China's super rich show doubt about country's economic future

A lot of foreigners seem to think that the world’s economic future belongs to China, but the Chinese super rich are not so sure. And their doubts could spell trouble for the Chinese economic miracle.

A report just published by Bain and Company, an international consultancy, finds that almost 60 percent of China’s wealthiest individuals are thinking of leaving the country: They have either secured permanent resident status abroad or are considering it.

And if China’s economy sours, those multimillionaires could knock a dangerous hole in the country’s massive foreign exchange reserves by moving even a relatively small proportion of their money abroad, according to research presented earlier this month by Victor Shih, an economist at Northwestern University in Chicago.

The ranks of the mega-rich are swelling fast in China. Forbes magazine this week put 213 billionaires on its new China Rich List, and the Bain study estimates that there will be more than 590,000 Chinese with over $1.5 million in investable assets by the end of this year.

Immigrant investor status abroad

Bain estimates that the number of “high net worth individuals,” seeking immigrant investor status abroad – essentially buying foreign residence rights with large investments under government programs – has risen by 73 percent over the past five years.

Over a quarter of the very richest, with $15 million or more in investable assets, have already secured US green cards or equivalent in countries such as Australia and Canada, the Bain report says.

In the past two years China has become the largest market for EP-5 visas to the United States, which give holders the right to live there, and apply for citizenship, if they invest $500,000 in a business in an underdeveloped region that creates 10 jobs for two years.

“Chinese interest is very high for several reasons,” says Brian Su, a business consultant who specializes in EP-5 visas for Chinese citizens. “The top reason is personal security… and they also want to diversify their investments outside China.”

Many of the rich Chinese investing abroad to win residence rights do so to ensure their childrens’ education at foreign universities, or their own retirement in comfortable security, the Bain report says. But they are also attaching new importance to making their wealth safe.

“They know that wealth accumulated in a disorderly environment” such as China’s rough-and-tumble economic reform and growth “can easily disappear in the same environment” commented Gu Jun, a Sociology professor at Shanghai University, in an online discussion of the Bain findings hosted by Eastmoney.com. “If order is predictable, wealth is safe.”

At the same time, China offers limited options for wealthy individuals seeking to place their money profitably: Real bank interest rates are negative – lower than inflation rates – the stock market is currently flat, and the real estate market explosion is widely seen as a bubble waiting to burst.

Those incentives to seek safer and more profitable investments abroad would be strengthened by any downturn in the Chinese economy, points out Professor Shih in a paper he delivered earlier this month to a conference in Bretton Woods, New Hampshire.

Shih estimates that the top 1 percent of China’s wealthiest households control assets equivalent to at least two thirds of China’s 3 trillion dollars in foreign exchange reserves. He warns that if they moved 30 to 40 percent of their wealth overseas they would deplete China’s reserves by 1 trillion dollars.

Danger zone

Multiple channels exist to circumvent Chinese exchange control mechanisms. The high concentration of wealth and negative interest rates at home combine to create extremely fragile conditions for China’s foreign exchange reserve, which is the backbone of the entire financial system of China, says Shih.

“Even if they [the wealthiest Chinese] reallocate a minority share of their wealth overseas,” he adds, “China’s foreign exchange reserve will deplete by a significant and dangerous degree.”

Capital outflows do not currently constitute anything like panicky capital flight, analysts point out. And the sharp rise in wealthy Chinese seeking havens for their money abroad “does not mean they are rushing for the doors,” says Michael Pettis, who teaches finance at Peking University.

“But it does suggest,” he adds, “that they are all making sure they know where the doors are.”